Web Connected TVs Will Help You Cut The Cable Cord

NEW YORK
(AdAge.com) -- Considering cutting your Cablevision subscription?
It's not just the cable industry that would rather you didn't;
it's also TV networks and studios that make bank off your monthly
bill.

But device-makers from Samsung to Boxee to Apple TV have no such
concerns -- and they're continuing to roll out products that
bypass the cable box and draw content and services directly from
the web, setting up what could be one of the entertainment
industry's biggest business battles of the next few years. Think:
the current print-media implosion, but with much more money at
stake.

"The consumer electronics makers are really the only ones who
don't have anything to lose if consumers switch," said Forrester
Research analyst James McQuivey. "Everyone else is conflicted."

Netflix in particular is in the midst of a push to be a native
application on TVs and gaming consoles. Last week it announced a
deal with Nintendo's Wii gaming console for its on-demand
movie-streaming service; Netflix is already on Sony's PS3 and
Microsoft's Xbox, not to mention TVs and Blu-ray players from
Samsung, LG Electronics, Sony, Best Buy's Insignia and Vizio.

At the annual Consumer Electronics Show in Las Vegas, cable
operators got a look at a device that could start to eat into
another core business: TVs with built-in Skype access. LG and
Panasonic announced partnerships to start shipping the sets later
this year.

Selling point
The consumer-electronics industry has a long history of
over-promising; years of chatter have yet to yield a line of
affordable mass-market 3-D TVs you can buy in stores, for
example. "A lot of manufacturers have come out and made
announcements, but I don't think they really are in a position to
erode the pay-TV subscriptions that the cable industry has
today," said Park Associates research analyst Jayant Dafari.

Yet content and features built directly into the TV have become
the selling point for the next generation of high-definition
sets, gaming consoles and boxes. And none of it is coming from
your cable operator.

"Still no evidence of cord-cutting, but as prices spiral higher,
the stresses on the system are unquestionably growing," said
Craig Moffett, senior analyst at Sanford C. Bernstein.

But customers are cutting back on cable bills: while rates go up
every year, the average amount consumers are paying for digital
cable dropped from $79 a month in the third quarter of 2008 to
$70 in the third quarter of 2009 as they drop additional channels
and services, according to research from Centris.

Cable still has the most complete reserves of TV programming,
films and video-on-demand, as well as a near-lock on live sports
and news. But web-based devices are getting closer to offering
the full deal. Avner Ronen, CEO of startup Boxee, estimates 60%
of broadcast TV is available online free in some form, and 10% of
cable TV.

Waiting for clampdown
The question is: When will cable put a stop to it? So far, the
industry has been relatively laissez-faire about the situation,
but one tech exec, who asked not to be named, predicted that the
minute cable operators start to feel the disruption, they will
clamp down and use their market power to keep TV and films from
seeping into next-generation devices. They're already putting the
squeeze on networks; any free distribution is an argument for
lower cable distribution fees.

In the meantime, they insist that cable-cutting is more urban
myth than reality. "We see some interesting stuff out there, but
right now people are watching more TV than ever; cable-cutting is
largely on the fringe," said Alex Dudley, spokesman for Time
Warner Cable, the nation's No. 2 operator.

The audiences for these web-connected devices are starting to
scale to the point at which marketers become interested. Parks
Associates estimates that the consumer electronics industry will
sell 80 million net-connected TVs by 2013, and there are already
20 million net-connected Xbox consoles in circulation. Recently,
Microsoft said it had 2.2 million Xbox users online at the same
time -- about the audience of an episode of "Gossip Girl." Within
that experience, Xbox is selling traditional spots, branded
entertainment and display advertising to brands like Sprint.

Boxee, which unveiled a set-top box at CES, first released its
software on the web in 2007 and now has 850,000 registered users.
It pulls video and other content from the web and displays it
with an interface optimized for 10-foot viewing on TV.

Last year Boxee added Hulu content, but was later blocked by the
participating broadcasters. Boxee displays video with ads intact,
but since Hulu shows TV with a fraction of the ads, putting the
web version on TV is intrinsically destructive to NBC, Fox and
ABC's business model.

Snubbing the box
So what did Boxee do? It added a web browser to its box, so users
can simply surf over to Hulu.com and watch as if they were on
their computer, an inelegant bridge, to be sure, but another
incremental snub of the cable box.

In the coming weeks, Boxee will add the ability to sell
subscriptions on a pay-per-view or channel basis, much like
iTunes, Netflix or Microsoft's Zune service.

For the vast majority, devices like connected TVs, Boxee, Xbox,
Roku, Netflix, etc., are additive to cable. "Personally, I think
there is a style of TV viewing that is a more passive activity
rather than the more active decision to use Apple TV or Xbox,"
said Mike Vorhaus, president of Magid Advisors.

But more and more, people don't care how their content is
delivered, which is a scary thought for the cable industry and a
key reason Comcast is acquiring its own content mill in NBC
Universal, as well as pushing Comcast's own, proprietary web-TV
plans. One thing the cable operators have on their side is they
are cash-rich and can make acquisitions of media or technology
companies that start to disrupt their models.

"For many people, cable works just fine; the quality is great;
the DVR functionality is great; the only gripe they have is that
they're paying for it," said Boxee's Mr. Ronen. But "there is a
growing generation out there where the whole definition of
entertainment is changing, and their main source of entertainment
is the internet."